Danish defence news: Offset collision and budget expansion ahead

On 25 January 2018, the EU Commission opened infringement procedures against five member states including Denmark for not complying with the public procurement rules. The issue of a formal notice letter to Denmark is a blow against the offset regime introduced by the administration in 2014 with the explicit objective to avoid a confrontation with the EU.

A number of political parties - that represent a significant and stable majority in the Danish Parliament have made a six-year defence policy and budget accord, which provides for the largest increase in military spending in modern history.

The Danish offset regime under attack

In Denmark, offset has a long tradition as far as defence procurement is concerned. The word offset holds negative connotations, so in Denmark it is called "industrial cooperation" – indicating that the procurement terms oblige the international supplier to enter into cooperative arrangements with Danish industry.

The treaty provisions, which allow member states to impose such terms upon suppliers, are precise and restrictive. In 2014, the Danish Ministry for Commerce developed an entirely new regime for IC terms in an attempt to avoid an intervention from the EU Commission. The regime is complicated and involves both the Defence Ministry and the Ministry for Commerce in an interactive process leading to administrative decisions concerning offset demands. The reasoning behind such decisions is in many ways inconclusively circular and in any respect confidential. Today, it seems clear that the new regime did not produce any material change as to whether offset obligations are required or not.

The obvious lack of change led the EU Commission to execute an investigation against Denmark in 2017 – in the context of a general effort to monitor the effective application and enforcement of the Defence Directive provisions ensuring the free movement of goods and services within the EU. This resulted in a formal infringement procedure against Denmark, who has two months to respond.

In its press release (EU Press Release 25 january 2018), the EU Commission states that generally it has found that Denmark's offset regime violates treaty and directive requirements. The Commission also launched a case against the Netherlands for the same general reasons.

Opening letters to Italy, Portugal and Poland do not concern their respective offset systems as such, but the fact that specific supply contracts were awarded to national suppliers without adhering to the EU procurement procedures.

Denmark increases it military budget dramatically

Political parties representing a majority in Parliament have now concluded a six-year defence accord.
Denmark has a long tradition of securing stability behind the defence policy, defence strategies and initiatives with long-term agreements, to which a very broad majority of political parties participate.

The defence accord will govern Danish military operations, developments and budgets from 2018 to 2023. The key objective is to implement the ambitions of the 2014 Wales Declaration, which called for NATO member states to increase defence spending and investments, and to ensure active participation in the joint defence capacity.

During the six-year period, the 2018 Defence Accord will increase Danish defence annual budgets by 20 %, equal to an annual budget expansion by more than USD 2. Reaching a 1.3 % of BNP in 2023, this is still far from the 2 % NATO target, but nevertheless the most dramatic expansion since the Cold War era.

The increased budget is not itemized. However, the accord focuses on Denmark's participation capability in international operations including the ambition to expand the air transport capacity. Moreover, it is the explicit ambition to fortify air and submarine defence systems, including new missiles. In addition, investments in cyber security and defence development and capabilities will be core priorities in the procurement decisions made until 2023.

Horten has broad experience in defence industry issues

Horten advises international and national actors in the defence industry on legal issues pertaining to public procurement procedures and purchase contracts, including offset requirements when applicable. Horten provides legal advice in respect of discharge of offset obligations, including the conclusion of Industrial Cooperation Contracts between foreign and Danish operators. Moreover, Horten's international and national network is instrumental in bringing industrial interests together to facilitate offset discharge.

Horten is a member of the network organisations Danish Defence and Security Industries Association (DI-FAD) and Centre for Defence, Space and Security (CenSec).

Horten will attend the Danish Defence Annual Conference 2018 (DDAC), which will take place in Copenhagen on 7-8 February 2018.

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Poul Hvilsted

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